Recent research has demonstrated that structural credit risk models are capable of explaining the credit risk process for private, illiquid debt. This article extends this literature by proposing a simple and intuitive calibration approach using Bayesian inference to capture the nonlinear dynamics of debt service cover ratios using a new dataset of private cash flows collected by hand for 267 European infrastructure projects spanning 17 years. The combination of a cash flow–driven structural model with observable cash flow data and Bayesian inference enables the measurement of default risk even when few or no defaults have been or can be observed, whereas reduced-form models like the ones used by rating agencies necessarily lead to biased credit risk estimates for private debt.
Dividend yields are a determinant of asset prices, but changes in dividend growth impact both dividend yields and discount rates. As a result, dividend growth is typically treated as a known constant in most of the literature.
In this paper, we develop a dynamic approach to forecasting dividend growth using Bayesian filtering techniques, which improves markedly on standard linear methods. The resulting growth-adjusted dividend yield improves out-of-sample return predictions by several orders of magnitude. These results show that dynamic cash flow modeling can significantly improve the performance of expected return models.
This paper presents the results of the 2017 EDHEC/GIH survey on investor perceptions of infrastructure, revealing infrastructure investors’ medium-term investment intentions, views on market developments, and the efficacy of national infrastructure plans. It also introduces the findings of a new approach to determining the required returns on infrastructure investments required by investors.
The survey provides an annual insight into investors’ perceptions of infrastructure, capturing the changes in their views of the market, expectations of returns, and determining which government/ private initiatives or services are useful to them, or not. It builds on the 2016 instalment and where relevant, provides a comparison to the findings from 2016.
In this position paper, we document the dangerous rise of the so-called listed infrastructure asset class, an ill-defined series of financial products that initially targeted retail investors and now increasingly reaches institutional investors, which now represent close to a third of the sector. As part of the study we reviewed the documentation, weights and constituents of 144 listed infrastructure funds, representing close to 90% of this $60 billion sector.
Contents:
– Access to Infrastructure Investment and #fakeInfra
– Is Listed Infrastructure an Asset Class?
– Private Infrastructure Equity Investment Benchmarks
– Private Infrastructure Debt Benchmarks
– The Valuation of Private Assets
– How to Derive Equity and Debt Index Results
This issue is an Infrastructure Benchmarking Special.
We first address the rise of #fakeInfra and how it has been an obstacle to the development of real infrastructure investment. There is no such thing as a “listed infrastructure asset class.” It is presented to investors as an opportunity to gain exposure to something new or rare, but has really always been available — that is, it is already “spanned” by existing capital market and other instruments.
Contents:
– Towards better infrastructure investment products?
– Looking for a listed infrastructure asset class
– Is private infrastructure different?
– Tracking credit metrics in private infrastructure debt
– Data collection for infrastructure investment benchmarking
In this Special Issue of EDHECinfra Research Insights We present the result of the first in-depth survey of institutional investors’ perceptions and expectations of infrastructure investment. Almost two thirds of surveyed institutions declared that they wanted to increase their current holdings of infrastructure investments.
The survey reveals some important evolutions and also important differences of perspectives, amongst investors and also between asset owners and managers. One of the key findings is that investors have no bench- marks and do not trust reported valuations.In a short article, we then look at whether an asset class of listed infrastructure exists. We do not manage to find listed proxies for infrastructure assets. We conclude that what is typically referred to as listed infrastructure is not an asset class or a unique combination of market factors. It cannot be persistently distinguished from existing exposures in investors’ portfolios. Expecting the emergence of a new or unique “infrastructure asset class” by focusing on public equities selected on the basis of industrial sectors is unlikely to be very useful for investors.
This study extends the literature by taking an asset pricing approach to examine whether infrastructure is indeed an asset class or otherwise. The question posed in this study has important implications in portfolio management and to long-term investors (such as pension and superannuation funds).
If infrastructure assets offer superior risk-adjusted returns over and above other asset classes (such as stocks, bonds, real estate, cash) then these investments will become the dominant asset class going forward. Conversely, if infrastructure assets do not exhibit return, risk and correlation characteristics which are not distinguishable from other asset classes then it can be argued that they may be classified as investment substitutes for current investments and they cannot be deemed as an asset class.
Our study presents evidence that global and regional publicly listed infrastructure index returns cannot be considered as a separate asset class. Our results suggest that listed infrastructure does not exhibit sufficient differences in their return, risk and correlations to warrant the classifications a separate asset class.
In this paper, we present the first results of a multiyear project to create and compute fully fledged private infrastructure debt investment benchmarks. The first version of these indices span 14 European countries over 16 years, going back to 2000. They are built from a representative sample by size and vintage of the private European infrastructure debt market, including hundreds of borrowers and debt instruments over that period.
In particular, we focus on what distinguishes infrastructure debt from corporate debt. When developing this research, we used two competing views of what defines infrastructure investment:
The first one equates infrastructure investment with “project finance”¹ and echoes the June 2016 advice of the European insurance regulator (EIOPA, 2016) to the European Commission to define ”qualifying infrastructure” for the purposes of the Solvency-II directive;
The second view, also expressed during recent prudential regulatory consultations, defines infrastructure investment more broadly and proposes to include “infrastructure corporates” to the definition of qualifying infrastructure assets, effectively arguing that a number of firms – because they operate in industrial sectors corresponding to real-world infrastructure – constitute in themselves a unique asset class, with its own risk/reward profile.
This paper presents the first results of an ambitious applied research project to create and compute fully fledged private infrastructure equity investment benchmarks. The indices we created span 14 European countries over 16 years, going back to 2000. In this paper we focus on three questions:
1. How does a “broad market” index of private infrastructure equity investments perform relative to a public equity market reference index?
2. Is there a difference between the risk-adjusted performance of contracted, merchant, and regulated infrastructure, or between investing in “project finance” vehicles and “infrastructure corporates”?
3. How much diversification of investment specific risk can be achieved in portfolios of private infrastructure equity investments?
In this Spring 2017 issue of the EDHEC/IP&E Research Supplement, research by EDHECinfra includes the summary results of the first in-depth survey of institutional investors’ perceptions and expectations of infrastructure investment.
It documents the reasons for investing in infrastructure and whether currently available investment products or strategies are helping investors meet these objectives.
The findings provide a first step towards integrating infrastructure in long-term investment solutions. Key findings are reported in the following areas: investment beliefs; products and objectives; benchmarking; and ESG (environmental, social and governance).
We also ask whether focusing on listed infrastructure stocks creates diversification benefits previously unavailable to large investors that are already active in public markets. We conclude that what is typically referred to as listed infrastructure is not an asset class or a unique combination of market factors, but instead cannot be persistently distinguished from existing exposures in investors’ portfolios.